Market Update: Inflation, Volatility and Ukraine

Markets have been volatile since the beginning of 2022. As of February 16th, the S&P 500 was down 6.1% on the year. Inflation continues to rise and energy markets have been pressured by Russia’s attack on Ukraine. As long-term investors, the most important takeaway is to stay focused on long-term objectives and results. Attempting to time the market during periods of volatility can turn out badly as markets move up and down significantly on a daily basis. The S&P 500 typically declines at least 5% several times throughout a year. Additionally, most years see at least one stock market correction of 10% or more. All of those downturns are embedded in historical 30 year average market returns we show in the video. Staying the course is the most important action to take for long-term investors.

Market Valuation:

The correction in the stock market has made stocks somewhat more attractive. However, as of February 16th, the S&P 500 was still trading at 19-20x forward earnings, well above its historical average. Assuming long-term interest rates remain low, we believe valuations could still fall into the high-teens before normalizing.

Inflation:

As measured by the Consumer Price Index (CPI), inflation continues to rise. Industries are generally producing as many units as they were before the pandemic. Those items are traveling through supply chains to reach consumers. The rare exceptions are travel and new cars; however, executives in both industries expect a record summer season and normalization by the end of 2022. The “supply chain crisis” is now over. Inflation is now driven by demand. Inflation is caused by excess stimulus dollars in the pockets of consumers, rising wages and increases in investment portfolio values. In addition to supply and deman fundamentals, future expectations about inflation are key to actual inflation. Expecations of inflation cause workers to ask for raises, which increases the cost of producing a product or service, which increases the price. This can turn into an inflationary spiral. Notibly, consumers expect inflation to moderate in the second half of the year, which should keep further wage increases in-check. It’s also worth noting the importance of investing versus holding assets in cash. $100,000 invested in rolling 6-month CDs in the 1990s is now worth less than $93,000. Inflation has eaten away at the returns on cash while investment markets have provided long-term compound returns.

Ukraine:

First and foremost, beyond markets. The invasion of Ukraine is a terrible human tragedy. That should not be forgotten even as we consider the impact to our lives outside the conflict area.

Ukraine’s GDP is smaller than many larger U.S. companies, thus the impact of the Ukrainian economy on global GDP will be muted. However, Russia is a significant supplier of natural resources, most importantly Oil and Gas. Sanctions and other indirect actions are likely to have a significant impact on the Russian economy, which will impact global commodity prices. Owning a well-diversified portfolio that includes exposure to comodities and gold is key in uncertain times. Commodity markets are complex. Expertise and guidance are critical to successful investing in these markets.

For more on building modern, diversified portfolios that include commodities, read our article from earlier this year: When Everything Loses Value: The Case for Modern Asset Allocation.

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